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Tokyo All-Grade Vacancy Rate Falls Below 3% for First Time Since Q3 2008

Tokyo, April 20, 2016 - CBRE Research today released market trends for office buildings in thirteen cities across Japan.

Highlights

The Grade A vacancy rate in Tokyo declined 0.4 percentage points q-o-q to 2.9%, falling below 3% for the first time since Q3 2008

The Osaka Grade A vacancy rate rose for the first time in three years. However, the All-Grade vacancy rate continued to decline, driven by strong leasing activity from mid-sized companies with solid earnings.

Despite increasing in the previous quarter due to new supply, the Nagoya Grade A vacancy rate declined in Q1 2016 .

Rents increased in almost all regional cities.

■ Tokyo 23 Wards

The All-Grade vacancy rate in Tokyo's 23 wards declined by 0.3 percentage points q-o-q to 2.7% in Q1 2016, falling below 3% for the first time since Q3 2008. For expansion or consolidation reasons, a large volume of space was leased by companies that needed to secure a new office before April, the start of a new fiscal year.

How the fall in share prices and the appreciation of the yen since the start of 2016 will affect corporate earnings, and hence demand for offices, has caused concern. According to the latest data, these factors have not had an effect on office demand thus far. Nevertheless, companies could be less willing to relocate if the economic outlook remains unclear for a prolonged period.

In Q1 2016, the Grade A vacancy rate in Tokyo declined by 0.4 percentage points q-o-q to 2.9%, also falling below 3% for the first time since Q3 2008. In the Marunouchi/Otemachi area, the vacancy rate declined by 1.1 percentage points to 1.3%. This was primarily due to a newly merged asset management company consolidating their offices and taking a large amount of space in a new building that was completed in 2015. In the Shinjuku area, the JR Shinjuku Miraina Tower reached completion this quarter, making it the first new building in the district in around four years. While there was space available upon completion, the building is unlikely to stay vacant for long as it is situated in a very convenient location and provides direct access to JR Shinjuku Station.

Grade A assumed achievable rents rose by 1.3% q-o-q to JPY 34,900 per tsubo. As well as new buildings pushing up average rents, owners of some cheaper buildings (rents under JPY 30,000 per tsubo) also increased their asking rents.

"This quarter saw several local and international companies across a broad range of sectors complete relocations for positive motives such as seeking a better location and for expansion," commented Hideki Maruyama, executive director of CBRE's Office Services team in Japan. "However, concerns over the slowdown in the global economy have begun to shape tenants' relocation plans, meaning that landlords of some buildings may need to be more flexible than before. It remains to be seen how successful large buildings due for completion between now and March 2017 will be in finding tenants. "

■ Osaka

In Q1 2016, the Osaka All-Grade vacancy rate declined by 0.3 points q-o-q to 5.3%, marking the 12th consecutive quarterly decline, surpassing the 11 consecutive quarterly decline recorded between Q3 2004 and Q2 2007. For the past two quarters the decline in the vacancy rate has been driven by stable demand for Grade B offices, led by mid-sized companies with solid earnings performance, seeking both location and building upgrades. Given the limited new supply and low possibility of any sizable departures, the supply-demand balance is likely to further tighten in the upcoming quarters.

The Osaka Grade A vacancy rate rose for the first time in 13 quarters to 4.8%, an increase of 0.3 points q-o-q. Vacancy in a couple of buildings with rents towards the top end of the market is taking some time to lease up, while there was some additional vacant space which surfaced during the quarter. This was due to major corporates becoming more cautious amid the weaker economic outlook. Grade A assumed achievable rents recorded quarterly growth for the seventh consecutive quarter, although the growth rate was relatively modest at 0.2%, reaching JPY 20,150 per tsubo.

“The weaker economic outlook has prompted some occupiers to be more cautious, but demand for business expansion remains robust overall,” commented Takashi Katono, executive director of CBRE’s Kansai branch. “Although Grade A vacancy rate rose during the quarter, the limited new supply expected over the next couple of years means that the supply-demand balance should continue to tighten.”

■ Nagoya

In Q1 2016, the All-Grade vacancy rate in Nagoya declined by 0.1 percentage points q-o-q to 4.2%, marking the ninth consecutive quarterly fall. Although fewer tenants moved than in the previous quarter, vacant space was filled by companies relocating to larger offices to accommodate growing operations. There are concerns that tenants moving into the two large buildings that were completed in Q4 2015 will cause vacancies in their previous buildings. However, the amount of space that will actually come back onto the market is likely to be limited. This is because there are plenty of enquiries from companies either looking to relocate from suburban areas, expand, or in some cases, take additional space in their existing buildings.

The Nagoya Grade A vacancy rate declined by 0.6 percentage points q-o-q to 3.4% in Q1 2016. Vacancy rose in Q4 2015 due to the completion of two new buildings but resumed its decline this quarter. Vacant space was filled in a number of buildings as companies rented additional spaces or moved to better locations, primarily around the Nagoya Station area. Grade A assumed achievable rents rose by 1.7% q-o-q to JPY 23,650 per tsubo. Occupancy also improved in Grade A buildings outside the Nagoya Station area, prompting some owners to revise their minimum rents.

"The market remains tight and there is only a limited amount of space available," commented Takahiro Fujimoto, executive director of CBRE's Nagoya Branch. "Market conditions are unlikely to change for some time as no large spaces are expected to enter the market. Rents also show signs of rising further, particularly in higher grade buildings."

■ Nationwide

Vacancy rates declined q-o-q in eleven of the thirteen cities surveyed in Q1 2016. In Sapporo, where a major IT company took a space for a new office opening, the vacancy rate declined by 0.1 percentage points q-o-q to 2.4%. The vacancy rate in Fukuoka also declined by 0.1 percentage points to 2.4%, thanks to several companies opening new call centers and renting additional space. Vacancy in both cities set new historical lows.

Within the Greater Tokyo area, the vacancy rate in Saitama declined by 0.8 percentage points q-o-q to 2.2%, the lowest rate in Japan. In Yokoyama, it fell by 1.0 percentage point to 4.7%, as a large volume of secondary space was let to a company which was consolidating into a single site.

Assumed achievable rents rose in nine out of ten regional cities, with the exception of Kobe. Rents increased by over 2% in Saitama and Fukuoka. Sendai, where rent rises have lagged somewhat behind other cities, also showed an increase over 1%, as a growing number of owners revised minimum rents, especially in buildings where occupancy rates have improved.